Remember in November when Goldman Sachs said it was “closing” its recommendations for oil trades? That didn’t last long.
Goldman’s prediction team is back, calling for a 4 part bull run in oil prices over the next 2 years. By December we’ll have $85 barrels of oil. By the end of 2010 it will be $95.
To prevent a run, developed countries need to cut their oil consumption. Developing countries will thirst for the crude. If the demand in developed countries doesn’t fall to offset the thirst, then an energy crisis will present itself.
Goldman doesn’t think we’ve exhausted our supply of oil in the ground. It thinks the problems with pulling crude are political. Regulatory issues, fear of touching natural resources, and decaying infrastructure, all contribute to the crunched oil supply.
Here’s Goldman’s vision (via FT’s Energy Source):
The price we now see is the right price for oil. It was temporarily knocked off its axis by the credit crunch and the global economic panic.
As the economy stablizes, and OPEC maintains lower production, oil prices will rise in the second half of 09, closing the year at $85. Goldman is also calling a bottom on the fall in demand. It thinks demand for oil will pick back up in the next few months.
“A structural bull market” takes over. Rising prices increases investment from non-OPEC sources. OPEC’s spare capacity comes on the market, as OPEC increases production “buying the market some time and helping build an inventory cushion that the market will eventually sorely need given Non-OPEC production declines.” The price of oil reaches $90 in the first half of 2010.
Energy shortage! Demand is back, the economy is rip roaring, and all our attention on the financial crisis, at the expense of the energy crisis, catches the world with its pants down. Oil hits $95 at the end of 2010.
For the past three years, the macroeconomic environment has been dominated by two recurring themes that have constrained economic growth: the financial crisis and the energy crisis. Although the financial crisis has been recognised, the energy crisis has not, as the deepening of the financial crisis did not allow oil prices to remain high enough for long enough to generate a solution to the energy problem, which has not gone away. Before last September, the macro economy simply shifted focus between each ongoing crisis: oil prices spike to $75/bbl, sub-prime crisis, spike to $100/bbl, the collapse of Bear Stearns, oil price spike to $150/bbl, and finally the collapse of Lehman brothers, with each event constraining growth in one way or another.
The reason why these became the two focal points is that they represented two extremely large global imbalances that needed to be resolved before strong global growth could comfortably resume. In the financials the imbalance was excessive debt and leverage and in energy it was the production capacity utilization rate which was near 100%. Note that even today during one of the worst global economic recessions since the 1930s, oil production capacity utilization is near 95%. Clearly, the market needed to deal with these imbalances, as not only did they constrain growth but each one exacerbated the other – higher oil prices exacerbated the savings glut which in turn fuelled more demand via leverage. By early last year, the two most favourite trades became long energy and short financials as the imbalances were so obvious.
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